Sanctions imposed on the Kremlin by western countries, financial penalties and the closure of Ukrainian airspace for Russia-licensed airlines have impacted their passenger and cargo business severely. The situation seems to be so bitter for Transaero, UTair, S7 and some other carriers that they demand compensation payments from their government to offset their sharp drop in traffic figures and resulting revenue setbacks.
Worst hit seems to be Russia’s third largest carrier by traffic volume, Siberian UTair that according to local voices has a mountain of accumulated debts totaling €1.2 billion. In order to keep
their fleet of 131 planes airborne the airline is in talks with banks to refinance short-term debts. In addition to this, UTair asked the government to provide state guarantees for debt
redemption, or else the cost situation might get out of hand.
According to Utair’s management, the weakening of the ruble against the euro and dollar, the near collapse of the tourist market and the sanctions imposed by western countries against major Russian state-controlled banks, which are deprived of foreign refunding sources have caused most of the financial problems the carrier is currently hit by. “Each single burden we could have shouldered individually, but together this poisoned package constitutes a severe threat to our airline and presumably other Russian carriers as well because we all are more or less affected by the economic doldrums,” admitted an airline executive.
On top of this comes the decision of 30 Russian airports to increase fuel prices by 6 to 7 percent. This added considerably to the financial woes UTair and most Russian airlines are currently facing.
Compensation demands become louder
Other carriers have meanwhile commenced knocking very audibly at the Kremlin’s doors. So does Transaero’s energetic CEO Olga Pleshakova who outlined the damages suffered by her airline as a result of the closure of Ukraine’s airspace for all Russian airlines enacted by Kiev’s government. This causes diversions, leads to extended flight times on certain routes and hence to more fuel burn. She also demands compensation from her government in one way or another.
But the problem of a much greater dimension than the present financial squeeze local airlines are exposed to is the massive downturn in passenger numbers and cargo transport on many intercontinental routes served by Russian carriers. “People have generally become more cautious as private reaction to the political crisis and deteriorating economic situation. This also affects their travel behavior that has notably changed to the negative in recent months,” states an expert quoted by news agency ItarTass.
Selective state aid distorts competition, claim carriers
In the meantime the struggle for the distribution of financial privileges has begun among local airlines. This is demonstrated by Oneworld alliance member S7 and ailing UTair that openly oppose the Kremlin’s traditional politics of granting state aid to selective airlines. Both carriers, including Mrs Pleshakova’s Transaero, that in the past have all been excluded from access to Putin’s cornucopia, demand to redistribute the funds available which have so far flown mostly into Aeroflot’s coffers. “This one-sided state support distorts market competition,” UTair Chief Andrej Martirosov told the newspaper Kommersant. In the critics’ view, an effective solution would be the abolition of 18 percent taxes levied by the government on all domestic flights. They also demand getting a “fair share of the cake” cashed in as Royalties from European airlines crossing Siberian territory. So far, this amounts to something from €250 to €350 million annually and is exclusively transferred to Aeroflot. According to Russia’s Transport Ministry this draining of European carrier’s liquidity compensates for lost traffic volumes snatched away from SU by their western competitors.
Brussels holds in contrast that this kind of modern-day waylaying is illegal since Russia committed itself contractually to abolish the Royalty scheme prior to becoming a member of the World Trade Organization – WTO. However, once in that club, Moscow swept this given promise hurriedly under the carpet.